UK: 3Q16 GDP rises 0.5%QoQ, but downside risks for 2017 remain high - ING

James Knightley, Senior Economist at ING, suggests that the strong UK GDP has removed any chance of a BoE rate cut next week, but further stimulus remains probable as growth slows in 2017.

Key Quotes

“UK 3Q GDP has come in above consensus expectations at 0.5%QoQ. (Cons 0.3%, ING forecast 0.4%). At this stage we only get the industry breakdown, which showed services grew 0.8%, led by a 2.2% jump in the transport & communications sub-group. Agriculture, forestry & fishing contracted 0.7% while manufacturing dropped 1% (after a 1.6% rise in 2Q16) and mining and quarrying rose 5.2% with construction falling 1.4%.

As can be seen, the components tend to be very volatile and this preliminary release of GDP gets revised often, due to the fact that only contains around 40% of the data that the final official report on GDP will contain in a few months’ time.

Today’s report clearly shows that the UK economy has done very well given the shock of the June 23rd Brexit vote. This can largely be put down to the fact that Brexit hasn’t yet happened and won’t happen for at least another two years. Improved weather and a strong British performance at the Olympic and Paralympic games may have helped lift the national mood and diverted attention away from Brexit related worries. In addition the plunge in the pound has made the UK look an attractive tourist destination. Given tourists’ dollars, euros and yen are buying much more sterling this too may be supporting retail sales while sterling’s weakness is also making exports more competitive.

However, the outlook for 2017 remains poor. Consumer spending is likely to come under downward pressure as inflation eats into household purchasing power. Inflation has jumped to 1% in response to sterling’s plunge pushing up the cost of imported goods and we expect it to push up above 3% next year, without a corresponding increase in wages.

We do expect the Autumn Budget Statement on November 23rd to result in some fiscal stimulus, but the bulk of it is likely to be focused on investment spending, which will take time to materialise. It is unlikely to happen quickly enough to offset the anticipated fall in private sector investment caused by the sharp pull-back in corporate expansion plans highlighted in surveys such as the BoE’s Agent Summary report. Additionally, while trade should benefit from sterling’s plunge, this uplift in an environment of fairly weak global growth is unlikely to offset the drags from weaker consumer spending and falling investment spending.”